OFCCP Publishes Proposed Standards for Evaluating Compensation Discrimination and Guidelines for Employer Self-Evaluations

On November 16, 2004, the United States Department of Labor’s Office of Contract Compliance Programs (OFCCP) published two proposals in the Federal Register (69 Fed. Reg. 67,246) for public comment: (1) standards for evaluating systemic compensation discrimination, and (2) guidelines for employer self-evaluation of compensation practices. The OFCCP’s proposals signal a fundamental shift in the agency’s method for compensation analysis and underscore the OFCCP’s increased focus on systemic compensation discrimination.

Contractors’ Obligations to Evaluate Their Compensation Systems

The OFCCP enforces Executive Order 11246 (EO 11246), which prohibits covered federal contractors and subcontractors (contractors) from discriminating on the basis of race, color, national origin, religion, or sex. OFCCP regulations require most contractors to develop and maintain annual written affirmative action programs (AAPs). In connection with developing AAPs, contractors are required to evaluate their “[c]ompensation system(s) to determine whether there are gender-, race- or ethnicity- based disparities,” (41 C.F.R. 60-2.17(b)(3)), although contractors are permitted to choose their own form of self-evaluation techniques. Additionally, in connection with responding to an Equal Opportunity Survey or an OFCCP compliance review, the contractor must provide annualized compensation data showing, among other things, total compensation by race and gender. With the new proposals, the OFCCP seeks to increase contractor compliance by providing guidance for auditing compensation practices during a compliance review, and as a result, establishing a stronger basis for pursuing investigations of compensation discrimination.

OFCCP Proposes a Definition of “Similarly Situated” Employees and Adopts the Multiple Regression Analysis

The first proposal published by the OFCCP is the Proposed Standards for Systemic Compensation Discrimination Under EO 11246 (Proposed Standards). The Proposed Standards have two significant components: (1) guidelines for determining which employees are “similarly situated” for purposes of comparing contractor pay decisions; and (2) the adoption of multiple regression analyses to identify disparities in compensation. The Proposed Standards reject the compensation analyses previously used “informally” by certain regions of the OFCCP, including the so-called Dubray Method or “pay-grade” analysis.

Under the Proposed Standards, employees are similarly situated if they are similar with respect to the work they perform, their responsibility level, and the skills and qualifications involved in their positions. Although preexisting groupings (e.g., pay grades) may be relevant in this evaluation, they are not determinative. The OFCCP may look at the “actual facts regarding employees’ work activities, responsibility, and skills and qualifications,” as well as preexisting groupings, job descriptions and employee interviews.

Also, under the Proposed Standards, a multiple regression analysis would be used to determine whether there are statistically significant compensation disparities between “similarly situated” employees. The multiple regression analysis seeks to determine the impact of race and gender on the employer’s compensation decisions by analyzing the effect of purportedly legitimate factors such as education, prior experience, tenure, time in the job, performance, productivity and geographic location. However, certain categories of jobs may have different factors that influence compensation. For example, while productivity and time in the position may be important factors for employees working in an assembly position, performance and prior work experience may be more important for senior level executives.

The OFCCP proposes to consider a disparity “statistically significant” if it is at a level of two or more standard deviations. However, the OFCCP will also seek anecdotal evidence of discrimination (e.g., individual comparisons between two employees, remarks by managers, experiences of individual employees) before making a finding of intentional discrimination.

OFCCP’s Guidelines for Self-Evaluation

The second proposal published by the OFCCP is the Guidelines for Self-Evaluation of Compensation Practices (Guidelines for Self-Evaluation). The Guidelines for Self-Evaluation offer contractors the opportunity to conduct a self-audit in lieu of an extensive compliance review of compensation practices by the OFCCP, so long as the self-audit comports with the Proposed Standards. Although a contractor may continue to use its own techniques for conducting a self-audit, a contractor that conducts a self-audit pursuant to the Guidelines for Self-Evaluation and finds no illegitimate pay disparities will be deemed in compliance by the OFCCP. Finally, contractors who assert that the self-evaluation is subject to protection from disclosure to the OFCCP (e.g., attorney-client privilege or attorney work-product privilege) may elect to certify compliance with the Guidelines for Self-Evaluation without producing compensation analysis documentation to OFCCP.

OFCCP’s Increased Focus on Compensation Practices

The Proposed Standards and Guidelines for Self-Evaluation are the latest signs of the OFCCP’s increased focus on compensation practices. In addition to issuing these proposed changes, there have been other significant developments:

• The OFCCP has increased its use of the Department of Labor’s Solicitor’s Office to bring compensation discrimination claims.

• The OFCCP has increased its financial recoveries (including upward salary adjustments for employees) by 31 percent over the previous fiscal year.

• The OFCCP has created a Division of Statistical Analysis, hired an expert statistician to head the group and has announced a goal of staffing each regional office with an expert-level statistician.

Despite these developments, contractors did receive a benefit in August 2004, when the OFCCP announced a new compliance review selection procedure that provides contractors advance notice that they will be sent a formal scheduling letter. This offers contractors the opportunity to review their AAPs and take remedial action in advance of an audit. Consequently, upon receipt of such a letter, a thorough self-evaluation of compensation practices should be considered, with advice of counsel. A self-evaluation may reveal unknown and inequitable disparities and, with the opportunity to address such disparities, reduce the likelihood of costly and protracted compliance reviews.

Conclusion

Contractors should be prepared for the OFCCP’s increased focus on compensation discrimination. This preparation may include identifying and tracking factors that do, or at least should, affect compensation in the organization, working with counsel to consider whether and when to evaluate the compensation system, and where appropriate, correcting pay inequities with suitable protections to minimize legal risks.